The History of Sales Tax in the United States

by Mark Faggiano

history of sales tax in the U.S.
It seems like sales tax has been around forever. It can especially feel like that when you’re swamped with paperwork and trying to figure out how much you owe to one state and when you’re supposed to pay in another. In the end, though, everything has a beginning, including the annoying taxes that can eat up so much of our time.

You might be surprised to learn just how young sales tax is in our country. After it first got started the idea spread around the country fairly quickly. However, it took one of our nation’s more desperate time periods to enact something that’s now a major moneymaker for states everywhere.

Born During the Great Depression
That’s right; sales tax isn’t even 100 years old yet. Of course tariffs and taxes on items aren’t anything new, with the most famous in our country being the Tea Tax that resulted in the Boston Tea Party. But modern sales tax as we know it only started sometime in the 1920s/early 1930s.

Strangely, which state started the sales tax first isn’t entirely clear. It may have been West Virginia that started it in 1921 or Kentucky around 1930. One problem is the exact definition of sales tax wasn’t set as tax on the purchase of items was unusual in the U.S. before then. What’s definitely known, though, is that the idea spread like wildfire.

As the Great Depression boiled on, states were in real jeopardy of going under. They saw the sales tax idea and jumped on it. At least 11 states had adopted a sales tax by 1933. By 1940, 18 more states had jumped on the bandwagon. Vermont held off until 1969. As of 2014, only five states haven’t adopted sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.

Why Sales Tax Stuck
Other taxes were attempted, of course. When times are desperate you’ll do anything you can to stay afloat. So taxes on things like labor were tried although they didn’t stick around. Legislators were worried that a tax on direct labor would cause a lack of productivity.

Sales tax, though, was a huge success. The economy in the 1930s was largely focused on selling goods, thus the sales tax was bringing in a ton of money. It was so successful that in 1970 sales tax became the largest source of income for states. This revenue source only began to be replaced by personal income tax in the 1990s.

Slowly the economy in the US has turned to more service-based than goods-based. However, governments are still hesitant to put taxes on services, although it does happen. Wonder where the Internet sales tax ordeal came from? This is a likely source. Every time there’s trouble or a dip in sales, states try to figure out how to make up for the lack of taxes. Often they’ll simply raise taxes, but that only goes so far.

Will the online sales tax be the next incarnation of this not-quite-a-hundred-year-old tax? It’s looking that way, but it should be no surprise considering the history. Until states attempt other means of raising money they’re going to rely on the old standbys, even if they don’t work like they used to in the Great Depression.

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